Tuesday, March 31, 2009

Disruptee outlives disruptor

Based on content licensed from Funk & Wagnalls and Collier’s Encyclopedia, in the 1990s Microsoft used a sub-$100 Encarta CD-ROMs to wipe out most of the dead tree encyclopedias.

As Blown to Bits (2000: 2) recounts

The CD-ROM came from nowhere and destroyed the printed encyclopedia business. Whereas Britannica sells for $1,5000 to $2,200 per set (depending on the quality of the binding), CD-ROM encyclopedias, such as Encarta, Grolier, and Compton, list for $50 to $70. But hardly anybody pays even that: the vast majority of copies are given away to promote the sale of ocmptuers and peripherals. With a marginal manufacutirng cost of $1.50 per copy, the CD-ROM as freebie makes good economic sense. The marginal cost of Britannica, in contrast, is about $250 for production plus about $500 to $600 for the salesperson’s commission.
Today Microsoft announced that it’s pulling the plug on both the CD-ROM and the online version of Encarta. The crowd sourced Wikipedia is credited with its demise.

At one level, Clay Christensen has yet another example for his disruptive innovation commoditization story — in which a commoditized technology itself gets commoditized. We saw this with minicomputers wiped out by PCs and someday PCs wiped out by mobile phones.

But I also find it interesting that Britannica (at least in its online version) will outlive Encarta. While Britannica is in its own life-and-death struggle with Wikipedia, it appears (at least in the short run) that its emphasis on quality is being recognized. (Benkler’s Wealth of Networks p. 71 gives an example of that interest).

This means we'll at least have Brittanica (paid), the Columbia Encyclopedia (available free on Dictionary.com) and Wikipedia. Given both Wikipedia’s severe limitations as well as the inherent risk of a single source of information for the world, as a member of a free society I hope the market doesn’t collapse any further.

More Cisco product placement

Cisco has a regular product placement position on 24, which is my favorite TV show now that the Sci-Fi Channel is defunct.

Throughout the series, CTU had the distinctive ring of a Cisco VoIP phone. (Now that CTU is defunct and Chloe is a housewife, I haven’t heard many phones ring this year.)

Two years ago, Cisco made a big deal about promoting its high-end videoconferencing (dubbed TelePresence) during an international crisis during 24.

On Monday night’s episode (Season 7, Episode 16) the FBI made a big deal about getting the POTUS to electronically sign a document using a Cisco WebEx (the videoconferencing company that Cisco bought in 2007). As the Cisco press release touts:

Tune in to Fox's award winning series 24 Monday night, March 30, 9/8c in the U.S and Canada to see a powerful scene featuring Cisco WebEx virtual collaboration tools in action.…

Fans continue to be excited by this year's action-packed Fox TV series 24. And, the action continues with Cisco WebEx taking a starring role in Episode 16. The story line has President Taylor and the FBI working against the clock and using Cisco WebEx virtual collaboration tools to sign a secure digital pardon in order to save the day!
About the only place where I agree is that this season is better than most. The collaboration tools are not part of a “powerful scene,” just an obvious product plug.

It’s not like this is cutting-edge technology. Digital signatures were introduced in Acrobat 4.0, a decade ago this April. The issue has always been the law (and habit), not the technology.

Still, as with all product placement, I have to hand it to the Fox producers for getting revenues from its series that still gets paid even if commercials are skipped and episodes are posted to GooTube.

Monday, March 30, 2009


We just had an earthquake here in downtown San Jose. I was in my office, on the 5th floor of a 9 story building.

Initially it felt like something heavy was going down the hall, but after that it was more as though King Kong had given the building a good shake. The motion was long and sustained — more than 10 seconds — but never violent.

I don’t know where the epicenter is, but if it was in the Bay Area, my guess was that it was around 5.0.

However, the USGS counts it as a 4.4, centered 16 miles southeast of downtown San Jose. According to KCBS radio, it was apparently felt in downtown San Francisco and as far north as Richmond.

I guess I found it deceptive because it lasted so long — and also because I’ve never been in this 25-year-old building during an earthquake.

Update 3pm: The USGS has downgraded its Richter estimate from the original 4.4 to 4.3.

Between a rock and a hard place

There‘s an old joke about “losing money on every sale but making it up on volume.”

This seems to be the looming collapse facing much (if not most) of the Internet streaming sites, as outlined by Monday morning’s Financial Times.

The article lists a double whammy: implacable royalty demands by music copyright holders and limited willingness to pay. To the former

Michael Bebel, who ran Ruckus says: “The labels have to understand that the ad market in this space is still developing,”.

“This means that they need to be happy with a revenue-share model that is not all that significant in terms of per-play.”
For the latter, substitutes limit pricing power:
The music industry will try to squeeze more money out of Apple’s leading iTunes store next month, when Apple will begin charging $1.29 in the US for the most popular songs, up from 99 cents.

But that will not make up for the revenues missed through illicit trading.

“The market leader isn’t iTunes. The market leader is free,” says Ged Day, the founder of early download site Bleep.com.
The article lists two dead sites (SpiralFrog, Ruckus) while other sites are either cutting costs (Imeem) or increasing prices (Last.fm).

Not mentioned is the longest-established streaming site, my former consulting client Live365, which now has a subscription based model in addition to ad revenues. Also missing is Pandora, the popular free streaming site for PCs and mobile phones that added ads earlier this year.

Normally we would expect the distribution channels to self-correct: if they can't pay the bills, either the entire industry will increase prices or the suppliers (labels) will moderate costs.

I don’t see the latter happening because the recorded music industry is essential a four-firm oligopoly. If anything, the track record with Hulu suggests that Hollywood would rather control the distribution channels (and any money) rather than help 3rd parties survive.

WIthout better options on either the supply or revenue side, these streaming sites are between a rock and a hard place.

Sunday, March 29, 2009

Facebook: more than just friends

I saw two vastly different examples this weekend about the use of Facebook for social organizing. Perhaps their motto should be “Facebook: More than just friends,” as they move past their old MySpace rivalry to simultaneously take on Twitter and LinkedIn.

Of course, Facebook (including a dedicated campaign application) was one of the tools that was credited with fueling the successful Obama campaign. One of Facebook founders, Chris Hughes, quit the company to head Obama’s new media efforts.

Consonant with the campaign success was the announcement Friday that students at UC Merced used Facebook to organize a successful letter writing campaign to convince First Lady Michelle Obama to speak at their graduation. It will be her only college commencement address this year.

The campus opened in 2003 and enrolled its first undergraduate students four years ago, so this year’s 400 graduates will include the first crop to spend their entire college career at the 815 acre campus.

The campus is the youngest and by all accounts the weakest of the University of California system, which includes the flagship Berkeley campus as well as UCLA, UCSD and six other campuses. The campus has high acceptance rates and low enrollment rates — for applicants outside the Central Valley, it is mainly a “safety school” to be used if nothing else pans out. One problem is that seven of the 10 schools are located in the desirable coastal strip of the state.

The visits by Mrs. Obama will certainly raise the school’s profile and awareness of its attractive new (but small) facilities. The students certainly should be commended for their gumption at attempting what might have seemed an impossible task.

At the other extreme (entirely) is the group “Tax Day Tea Party,” formed to protest President Obama’s economic policies. As one supported explained Friday:

In just over two weeks Americans will gather in cities across the country to rally against the big government tax and spend policies being proposed by the Obama administration and Democrats in Congress. Join the movement on tax day, April 15th. Find a tea party near you on the Nationwide Tax Day Tea Party website, Facebook page, or at Smart Girl Politics.
The group has a national Facebook group, and local Facebook groups for many of the 120 local protests that they are planning on April 15.

The effort is among the wave of efforts by conservatives to respond to Obama’s social networking successes at national organizing. However, the TDTP is explicitly outside the GOP sphere — perhaps because it doesn’t want to be tarnished by association with the GOP brand. It also seems to be more of an unfocused rejection of big government than a coherent political effort that in many ways seems like the second coming of Ross Perot.

Saturday, March 28, 2009

One newspaper budget cut too many

A former roommate (from our journalism days) emailed to share a rather egregious newspaper. The dead tree LA Times Friday published a page of their entertainment section (“Calendar”) with placeholders where the headings should be:

  • “tag briefs subhead large”
  • “Tag briefs subhead”
Pictures of the pages are shown on Lies.com.

The general reaction by readers and pundits was this sloppiness was the result of one budget cut too many. Once the most lucrative newspaper franchise in the country, the LAT has been hurting for years.

The greedy Chandler heirs sold the paper to the owners of the Chicago Tribune, which didn’t work out well for either one. Now — as with other papers — the current owner is trying to figure out how to extract profit from the real estate without wrecking that journalism stuff.

Despite the timing, the online-only LA Observed quotes an inside source who attributes it to a run-of-the-mill computer problem. Apparently a similar result was achieved in a November letter to the editor, at least in the online edition.

Friday, March 27, 2009

It's the software, stupid!

In less than two years, Apple has gone from no cellphone to having a single phone model that accounts for a 8.2% of the 2008 smartphone market (10.7% in Q4) and 0.9% of the overall 2008 market. The secrets have been its pre-existing industry ties (including its brand, desktop software and iTunes Music Store), its skills as a systems integrator, and their ingenious strategy for creating a new ecosystem.

However, at its core Apple has succeeded because it’s a great software company. They have been a software company since their founding — when Steve Wozniak wrote software to control Apple’s first floppy disk drive. Apple has changed what consumers (and the industry) expects from a smartphone through their software.

Of the major players in the industry, only one or two have the prospect of also being great software companies. The rest should admit that they’re a failure and outsource software to outsiders, shifting from vertically integrated R&D to open innovation. This reminds me of my post-doc, when I studied how Apple dumped its below-average manufacturing capabilities and from then on used outsourcing.

Clearly Research in Motion (16.6% of smartphones, 1.9% overall) is a great software company. There are aspects of the BlackBerry software that I don’t care for, such as the browser. However, there is no question that they have both created a compelling user client and built a tremendously successful, rapidly growing business around systems integration with their industry-leading backend.

The market leader Nokia is the other possibility. From what I’ve seen, they’ve succeeded despite rather than because of their software. They have volume, market share (38.6%by Gartner’s 2008 estimate) , branding and solid hardware, but no one (other than the most hardened Nokia bigot) would say that their software interfaces are compelling or lead the industry in ease of use. It has been steadily losing smartphone market share to the BlackBerry and now iPhone.

The wild card is Symbian, the longtime OS supplier for its high-end S60 phones. Nokia spent €264 million (more than $400 million) to buy that portion of Symbian it didn’t own already, with the deal closing last November. With the entire solution in house, will the Nokia team respond effectively to the iPhone challenge by hiring outside usability experts? Or will they continue to do more of the same, with hardware and software features substituting for a compelling user experience?

There are promising signs. Even before Nokia began to shift from handsets to services, it spent heavily on software. It has a more coherent platform strategy than any of the other top five vendors, limiting itself to S40 and S60. It also was an early adopter of WebKit — Apple’s modernization of KDE’s HTML libraries — and thus have a browser experience that approaches Apple’s and Google’s.

For the rest of the industry, the only hope is outsourcing software. Without the sin of pride and “not invented here,” Taiwan’s HTC has been gaining market share rapidly (from a low base) by using operating systems from Microsoft and Android. The enterprise-centric Windows Mobile doesn’t have a compelling user experience, and Android is a long way from being the ne plus ultra of cellphone experience, but they are both better options than what HTC could have done on its own.

Sony Ericsson (7.6% in 2008) is hardly sinless here: with parents like Sony and Ericsson it would be impossible. However, their falling market share appears to have woken them up. They have been a longtime member of the Symbian alliance, they’ve added Windows Mobile to their portfolio, and they have announced plans to ship an Android phone.

Motorola seems like it is also admitting their software weaknesses and moving towards open innovation. Software has been Motorola’s downfall as they missed the shift from component-based functionality to software-based functionality and thus have been a non-entity in smartphones,.

However, things seem to be changing in the face of unrelenting bad news: the longtime #2 vendor has fallen to 5th place (below 7%) in the Q4 estimates. Led by a new outside co-CEO with no allegiance to the old way of doing things., they seem to realize they have to do something new. Two of their three platforms are now outside platforms: WIndows Mobile and Android, and if Android proliferates to the low-end (as predicted), they can probably drop their legacy P2K low-end platform.

This leaves the two big Korean players, Samsung and LG, who were #2 and #3 in global sales in the 4th quarter and accounted for 16.3% and 8.4% for the entire year. Even more so than Nokia, they have succeeded despite their software.

Samsung has an incoherent smartphone strategy that surpasses even Motorola, with shallow experiments in just about everything. They shipped the best Palm OS phone ever, my longtime favorite the i500. They have been a Symbian member but done little with it. The closest thing they’ve had to a smartphone hit has been the BlackJack, which feels like a surfboard to me but has won some praise. They were an early member of the Embedded Linux Consortium and has long shipped Linux smartphones to China. Meanwhile, they are a founding member of both the LiMo and Android consortia, and claim they’ll ship examples of each this year.

At this point, Samsung seems committed to using open innovation for their high-end phones, but they still use their own OS for the bulk of their phones. Will they see software as essential to the usability of their products or just a cost to be minimized in their low end phones?

Historically, in electronics LG has copied its larger longtime rival. LG has done Windows Mobile and Symbian phones, and someday will do Android too. Still, LG seems even less committed to first-class software for its phones, and thus unique devices (like the LG Lotus) languish for lack of connectivity with applications and other devices.

I have long been skeptical of the prediction that the fragmentation of cellphone operating systems must inevitably end — a prediction that most recently I heard in December at a Symbian event and yesterday at an Android event. I think a bigger impact on fragmentation — and industry usability — would be to end the “not invented here” mentality and mediocre in-house software solutions, switching to one of the major shared platforms like Symbian, Android, or even Windows Mobile.

Thursday, March 26, 2009

Inflation solves/ruins everything

Since the global economy peak last summer, a number of key price measures have been falling — commodity prices, interest rates, asset values (like housing, stocks). Most things are much cheaper than they were 9 months ago.

Despite such obvious deflationary threat, there’s a significant undercurrent of concern about igniting the sort of runaway inflation that Paul Volker and Ronald Reagan beat 25 years ago.

The problem, of course, is government spending. First, Bush 43 spent hundreds of billions on bailout. This year House Democrats and the Obama administration spent nearly $800 billion on pet projects in the name of stimulus. Now the administration is proposing an additional $5 trillion of deficit spending over the next decade, pushing the deficit above 10% of GDP and keeping it above 3% (the maximum allowed for EU members) for more than a decade.

On Wednesday, the current president of the EU, Czech Prime Minister Mirek Topolanek, blasted American deficit spending:

"All of these steps, these combinations and permanency is the road to hell," Topolanek said. "We need to read the history books and the lessons of history and the biggest success of the (EU) is the refusal to go this way."

"Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the liquidity of the global financial market," Topolanek said.
Saner voices have been cautioning that the only way that the government could pay these huge deficits is to depreciate the value of the dollar so much that they can be paid back for cents on the dollar. Cheap money (and hyperinflation) has been used by 3rd world countries for decades, and also was the key issue of rural vs. city voters in various US elections in the 19th century (including the famous WJ Bryan “Cross of Gold” speech).

As a real estate owner with big mortgages, inflation has its attractions. However, overall, the long term prospects for the American economy would be grim.

One voice of reason came from Obama supporter Michael Kinsley. Hearkening back to the Weimar Republic (does anyone read history?), he laid out the inevitable implications of the bailout and stimulus spending in a Washington Post op-ed last month:
Trouble is, money well spent is still money spent. The reasons that made it a bad idea to run up all that debt haven't disappeared just because something even worse came along. Almost no one in Washington is talking about this. …

But even if the stimulus is a magnificent success, the money still has to be paid back. The plan of record apparently is that we keep borrowing, spending and stimulating, faster and faster, until suddenly, on some signal from heaven or Timothy Geithner, we all stop spending and start saving in recordbreaking amounts. Oh sure, that will work.

There is another way. If it's not the actual, secret plan, it will be an overwhelming temptation: Don't pay the money back. So far, even as one piggy bank after another astounds us with its emptiness, there have been only the faintest whispers about the possibility of an actual default by the U.S. government. Somewhat louder whispers can be heard, though, about the gradual default known as inflation. Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt -- public and private, U.S. bonds and jumbo mortgages -- in half.

Anyone who regards the prospect of double-digit inflation with insouciance is either too young to have lived through it the last time (the late 1970s) or too old to remember. Among other problems, inflation works only as a surprise or betrayal. It can never be part of any public, official plan. Plan for 10 percent inflation, and you'll get 20. Plan for 20 and you'll need a wheelbarrow to pay for your morning Starbucks. But if that's not the plan, what is?
Now this week the other shoe has dropped. As part of their efforts to end America’s two decade run as the unipolar superpower, Russia proposed that the dollar should be eliminated as the global reserve currency. Russia used America’s deficit spending and inevitable inflation as the pretext for their proposal.

The Russians organized a BIRC meeting in advance of the G-20 meeting, and this week the Chinese (who also want to weaken American influence) proposed their own version of the idea. The inept treasury secretary has sent mixed signals as to whether he’s for or against the proposal.

America’s trade deficit with China has made the Chinese the main buyer of American debt. Reuters reported the concerns of Chinese Premier Wen Jiabao almost two weeks ago:
China is the biggest holder of U.S. government debt and has invested an estimated 70% of its $2 trillion stockpile of foreign exchange reserves, the world's largest, in dollar assets.

"We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets. To speak truthfully, I do indeed have some worries.

"I would like, through you, to once again request America to maintain their creditworthiness, keep their promise and guarantee the safety of Chinese assets," Wen said.
If the dollar were no longer (or less often) the world currency, the value of the dollar would fall precipitously. Normally a cheap currency helps exports, but recent decades suggest it doesn’t help the US much since (except for food) our exports tend to be differentiated products rather than commodities.

To recap: high deficits mean eventually the government has no way to pay back its debt except by using inflation to wipe it out. The expectation of inflation becomes self-fulffing. And the prospect of US inflation will cause a loss of confidence in the dollar, a one-time hit as it loses its reserve currency status, and in turn will increase prices to American consumers and business as it costs more in dollars to buy ever more expensive imports.

Plus — as with any inflation — high US inflation would reward spenders, punish savers and potentially wipe out retirees on fixed incomes who had planned their entire lives to live off their defined contribution or non-COLA defined benefit pensions.

Much as I’d to get something for nothing on my real estate, it sounds like a very bad deal for American consumers — and an even worse mess to leave to our children and grandchildren.

Wednesday, March 25, 2009

Commoditization vs. customer support

One problem with commoditization is that it does away with the juicy profit margins that allowed for expensive things like human contact.

The exemplar of this new model is Google, which commoditizes everything with free services but makes no claim of any support whatsoever. As summarized by Randy Stross’s book, the entire model from day one has been to design out any human contact which (inherently) does not scale — a key difference from Yahoo’s origins with the hand-built web directory.

In some cases, this is not so bad: the Dell website is probably more accurate and honest than the average 1990s computer salesman.

But then there is tech support. Tech support as a way to resolve a specific problem is getting squeezed out wherever possible. Despite its high gross margins, Apple is doing their darnedest to eliminate human contact (even via email) unless you pay for a premium service plan.

Even if companies nominally provide service, that doesn’t mean that it’s competent — or that customer service reps have the authority to do something. I’ve been fighting Sprint for two months over replacing my broken Samsung i500; I’ve been paying for an “equipment protection” plan which will provide me with a phone I can’t use, but not the only direct replacement — their last remaining Palm OS phone, the Palm Centro. The polite telephone reps promise than an “escalation team” will call me back but no one has.

And then there is the black hole of nominal support. I bought a digital download from Amazon on February 24 but it didn’t download due to a bug in their software. I’ve contacted them twice via their online form but they’re ignoring me. If I’d purchased it with a credit card I could dispute it but I used a gift certificate so I’m stuck.

On Tuesday, Barbara Philips of the WSJ reviewed a book studying call centers, written by Emily Yellin. The book is cleverly titled Your Call Is (Not That) Important to Us.

Here is the relevant factoid du jour:

"The approximate cost of offering a live, American-based, customer service agent averages somewhere around $7.50 per phone call," Ms. Yellin says. "Outsourcing calls to live agents in another country brings the average cost down to about $2.35 per call. Having customers take care of the problems themselves, through an automated response phone system, averages around 32 cents per call, or contact."
Even if Phillips thinks the book reads like a series of magazine articles, it still seems like a useful read for anyone in an industry that supplies (or uses) human customer support.

Disruptive change is unpredictable

Deven Desai (a law professor in San Diego) has posted a provocative article over on the Madisonian blog about the inherent policy tradeoffs of using copyright to protect IP-based business models.

His specific topic is the Digital Millennium Copyright Act (DMCA), a Clinton-era sop to Hollywood that (in one element) banned circumventing copy protection. The act has been controversial for (among other reasons) upsetting the prior status quo about “fair use” that was established in the Betamax case.

One response to DMCA was DeCSS, a successful software library by European hackers to circumvent DVD copy protection. The library became a cause célebrè of civil libertarians among academia and elsewhere.

Prof. Desai makes general points about whether or not DMCA is a good idea, and the tendency of IP holders to overstate their case for protection of their existing business models. However, in describing the dilemma of making an IP policy before a new technology comes along, the money quote sounds more like an economist than a lawyer:

One does not know what technology will or won’t be disruptive. Furthermore, because we don’t know we should allow for more open systems to see what happens. Nonetheless, at least with DVDs we may find that certain technologies will not be pursued without the law agreeing to protect an existing business model.
I first subscribed to Madisonian because of my friend Mike Madison, but I continue to read it because it has a low volume of high quality analysis of copyright and other IP issues that impact technology businesses.

Tuesday, March 24, 2009

Recessionary cost savings: Linux < Windows < Mac

Steve Ballmer argued that it’s foolish to pay extra for a Mac in a recession. Then open source partisan Matt Asay argues that the same could be said about paying extra for a Windoze license on your $400 netbook.

As Asay concluded:

Why pay a few hundred dollars for Windows on a device that costs only a few hundred dollars and drops all the time? The economics of the recession may help Microsoft against Apple, but they're no help against Linux-based Netbooks.

Monday, March 23, 2009

First FedEx fatalities in Tokyo

The crash of a FedEx MD-11 cargo plane Monday morning marked the first fatal accident at Narita Airport since it opened in 1978, and the first fatal accident in FedEx’s 37 year history. (Contractors operating smaller flights have experienced their own fatalities).

Wind shear and low-altitude turbulence has been blamed, although the pilot may have overcompensated for these effects. There is also a suggestion that the MD-11 (a slightly updated DC-10) is prone to instability under such conditions.

The Daily Yomiuri has the most complete coverage so far. The US is sending NTSB and other investigators to help determine the cause.

The airport surveillance camera footage obtained by the Tokyo Broadcasting System is now on YouTube. Watching the doomed freighter bounce, roll and explode into flames (from multiple angles) is truly horrifying for anyone who’s ever been on a plane that landed in turbulent weather.

B-schools (and America) lose overseas customers

Business Week has an interesting article about how fewer foreign students are planning to enroll in US MBA programs next year.

Once upon a time, graduate students — mainly Europeans, Indians and Chinese — came to the US to get both a degree and a job here. Now students (rightfully) worry about getting work visas, and the Chinese (but not Indian and European) students think job prospects are better back home.

Of course, with the economy tanking, lots of people worry about getting a job in the US now; taking on $250K in debt in hopes of landing the six-figure paycheck is an understandably scary thought. The TARP bailout has also effectively prevented recipients from hiring H-1B students, forcing banks to rescind their prior job offers.

I have mixed feelings on this. On the one hand, every international student accepted is keeping out a local student. In many cases, the international students are more talented, but often (particularly in public universities) it seems like colleges take students with better math and worse English skills because they pay more.

On the other hand, one of the biggest American policy successes of the postwar era has been attracting the best and the brightest of the world to go to grad school and work here. We have been not just a beacon of political liberty, but of economic liberty as well.

Many of my local friends — particularly parents of my daughter’s classmates — are part of this Silicon Valley melting pot. I probably have a skewed sample: those who get married and move to suburbia, raise kids and get involved in their children’s education.

However, it seems as though employers are doing society a favor by saying “this person has the skills and personality to be an asset to our economy” and bringing over the highly-skilled, highly-educated workforce. (I feel quite a bit differently about importing would-be doctors and engineers and research scientists than I do about truck drivers, janitors — or lawyers.)

Of course, in times of economic contraction, worker-voters want to throw out all the foreign workers. (It has gotten particularly ugly in Britain). And it’s easy for a college professor and government employee with a lifetime employment guarantee to pooh-pooh such fears.

Still, economic growth comes from increases in total factor productivity. Attracting bright capable people from around the world — as well as keeping America the most desirable place in the world to live — would seem to be an important cultural and national asset in the coming century.

Sunday, March 22, 2009

Sound advice on the economy

By definition, winners of the Sveriges Riksbank Prize have made a lasting contribution to our understanding of economics. Some (but not all) continue to increase public understanding of economics long after they have been recognized.

This weekend, the WSJ interviewed 1992 winner Gary Becker, who is known for his understanding of labor markets. The title of the piece: “Now Is No Time to Give Up on Markets.”

He firmly rejects the popular (and populist) “wisdom” that the meltdown was caused by not enough government:

Mr. Becker sees the finger prints of big government all over today's economic woes. When I ask him about the sources of the mania in housing prices, the first culprit he names is the Fed. Low interest rates, he says, were "partly, maybe mainly, due to the Fed's policy of keeping [its] interest rates very low during 2002-2004." A second reason rates were low was the "high savings rates primarily from Asia and also from the rest of the world."

"People debate the relative importance of the two and I don't think we know exactly," Mr. Becker admits. But what is clear is that "when you have low interest rates, any long-lived assets tend to go up in price because they are based upon returns accruing over many years. When interest rates are low you don't discount these returns very much and you get high asset prices."

On top of that, Mr. Becker says, there were government policies aimed at "extending the scope of homeownership in the United States to low-credit, low-income families." This was done through "the Community Reinvestment Act in the '70s and then Fannie Mae and Freddie Mac later on" and it put many unqualified borrowers into the mix.

The third effect, Mr. Becker says, was the "bubble mentality." By this "I mean that much of the additional lending and borrowing was based on expectations that prices would continue to rise at rates we now recognize, and should have recognized then, were unsustainable."
He also argues — as many of us have — that efforts (by both Bush and Obama) to prop up the housing market today are merely delaying the necessary correction to set prices to a realistic level. (Full disclosure: I am long California real estate.)

He has other valuable comments about taxes, “too big to fail” banks, stimulus and the accuracy of studies claiming a multiplier effect for government spending. I commend the entire piece to anyone who cares about turning around the economy for long-term growth.

Saturday, March 21, 2009

Fair use quandary

The copyright “fair use” dispute continues between the AP and its freelance photographer Mannie Garcia — who took a 2006 photo of then-Senator Barack Obama — and poster artist Shepard Fairey, who has sold thousands of T-shirts and other nick-nacks with his colorized version of the Obama photo. (There’s even a Flash 10 website where you can colorize your own photo).

It is not clear how much Fairey has made off of the Obama image. Six months ago, the estimated pretax(?) profit was $400K, but that must be much higher by now. From one rendering alone — an inaugural poster — the gross revenues would be $1.4 million if it sold out. It seems like a conservative estimate of the gross revenues would be $3 million or more, with gross margins of 50% or more.

The AP countersued Fairey last week, saying that the artist had broken off discussions of licensing rights to the AP photo:

The cooperative said it tried to work out a license agreement with Fairey and agreed to donate proceeds from his prior use of the photo to a charitable fund that helps AP staffers who suffer personal losses in natural disasters and conflicts. Fairey cut off negotiations, the AP's lawsuit said.
The most detailed legal argument can be found from Carolyn Wright at her Photo Attorney blog. Some representative commentaries thus far:
  • For Fairey and derivative works: Erick Schonfeld on TechCrunch, Larry Lessig (whose lawyers are representing Fairey)
  • For the AP and copyright: Dan Wasserman of Boston.com.
  • A plague on both their houses: Joel West of you who who.
  • Strangely silent: IP law professor Mike Madison and friends at Madisonian.net; are they reluctant to criticize their friend and colleague for his efforts to use “free culture” to kill IP law once and for all?
On Monday, publishing executive and amateur IP economist L. Gordon Crovitz weighed in on the controversy. His “Information Age” column in the WSJ continues to grow in my estimation, as one of the few places where the economic realities of information business models are considered without predictable pandering to one side or the other.

Crovitz also starts out with the “plague on both their houses” approach, but eventually sides with the AP. While this might seem predictable for the former WSJ publisher, his version is far more nuanced than last Friday’s plea from ABC News president (and AP board member) David Westin.

Crovitz seemed offended by the scofflaw approach by the nominal artist:
As for Mr. Fairey, instead of agreeing on a licensing fee, he worked with Stanford University's Fair Use Project to sue the AP, claiming that the poster was fair use of the photo. The Stanford group, founded by Lawrence Lessig, favors fewer protections for copyright. In Mr. Lessig's recent book, "Remix," he rightly criticized many copyright claims. He cited the lawsuit brought by Universal Music against a woman for posting on YouTube an amusing clip of her infant dancing to a song by Prince. There's no opportunity to license snippets of songs and no harm done to Prince.

But this case is different. The AP and Mr. Garcia make their livings selling their work. As a reader commented on Mr. Lessig's blog, "I don't think photographers, professional and amateur, are going to appreciate free-culture types saying that their work is not creative since it only took a second to snap a picture."

The less-copyright-is-always-better crowd has an odd champion in Mr. Fairey. He earned street cred by being arrested for graffiti and uses imagery from Che Guevara and the Black Panthers, but such rebellion is now so establishment that he designed a current ad campaign for Saks Fifth Avenue. He and his lawyers often complain about alleged infringements of his copyrights by other designers.

Digital technology complicates copyright, but technology doesn't override the importance of showing respect for the work of others.
Claims of fair use reiterated from Feb. 5.

Attention: deficit disorder!

Huffington Post, July 28, 2008:

The government's budget deficit will surge past a half-trillion dollars next year, according to gloomy new estimates, a record flood of red ink that promises to force the winner of the presidential race to dramatically alter his economic agenda.

The deficit will hit $482 billion in the 2009 budget year that will be inherited by Democrat Barack Obama or Republican John McCain, the White House estimated Monday.

The result: the biggest deficit ever in terms of dollars, though several were higher in the 1980s and early 1990s as a percentage of the overall economy.
Huffington Post, February 26, 2009:
President Barack Obama charted a dramatic new course for the nation Thursday with a bold but contentious budget proposing higher taxes for the wealthy and the first steps toward guaranteed health care for all _ accompanied by an astonishing $1.75 trillion federal deficit that would be nearly four times the highest in history.
Congressional Budget Office blog, March 20, 2009:
Largely as a result of the enactment of recent legislation and the continuing turmoil in financial markets, CBO’s baseline projections of the deficit have risen by more than $400 billion in both 2009 and 2010 and by smaller amounts thereafter. Those projections assume that current laws and policies remain in place. Under that assumption, CBO now estimates that the deficit will total almost $1.7 trillion (12 percent of GDP) this year and $1.1 trillion (8 percent of GDP) next year—the largest deficits as a share of GDP since 1945.

Our analysis of the President’s [proposed] budget proposals indicates that:

As estimated by CBO and the Joint Committee on Taxation, the President’s proposals would add $4.8 trillion to the baseline deficits over the 2010–2019 period. CBO projects that if those proposals were enacted, the deficit would total $1.8 trillion (13 percent of GDP) in 2009 and $1.4 trillion (10 percent of GDP) in 2010. It would decline to about 4 percent of GDP by 2012 and remain between 4 percent and 6 percent of GDP through 2019.

The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBO’s baseline.
Forbes.com, March 20, 2009:
The key metric, when determining if a deficit is controllable, is looking at the ratio of the debt to the country's GDP. If this ratio is shrinking, then the debt is manageable. The White House said this would happen by 2013. The CBO says this will not happen, even by 2019. This difference between White House and CBO estimates is driven primarily by assumptions about the overall direction of the country's economy.

That economic reality could be even worse than what the CBO projects. After a 1.5% loss in 2009, the CBO says real GDP will grow by 4.1% in 2010 and 2011, hopeful assumptions shared by Obama's team. "As you emerge from a recession, economic growth rates can temporarily be quite high because you're starting from such a low base," promises Peter Orszag, director of the White House Office of Management and Budget.

This is indeed the case with some recessions. But growth can also be quite slow for years coming out of a recession, leaving tax revenues much lower—and deficits higher—than either the CBO or White House projections.

The White House estimates are "incredibly high by recent historical standards," says Martin Regalia, chief economist for the U.S. Chamber of Commerce. The Chamber, quick to point out that it supported both the $700 billion bank bailout and the stimulus package, is opposed to Obama's budget. If spending stays elevated without a robust recovery, an increase in taxes is one of the only ways to close the deficit.
Under the 1997 Stability and Growth Pact, the European Union requires less developed countries to have a budget deficit of 3% of less to be allowed to join the EU. The CBO predicts the Obama budget would double budget deficits (even after the economy recovers) and exceed the 3% figure as far indefinitely (at least a decade).

Friday, March 20, 2009

Favorite gadget du mois

I don’t like earbud headphones. If I had an iPhone, I’d buy a SmartTalk (even if it’s $20) to provide a microphone for use with my standard (clip on) stereo headphones.

At Fry’s earlier this month, I found a similar gadget for standard cellphones. The “Cellet 2.5mm Pin to 3.5mm Hole Adapter with Bilt-n Microphone & On/Off Switch” is available for $2 from an Amazon reseller. It’s also available elsewhere on the Internet. (UPC 00768 55735).

Oddly, Fry’s doesn’t sell the item that I bought there for $5. Instead, for the SKU (#5007995) they list a cable converter without a mike.

My main gripe is that the cord is 20" not 30", forcing me to store my phone in my shirt or coat pocket rather than a pants pocket. Still, I’ve had terrible luck with the durability of small portable headsets (and so far different problems with Bluetooth headsets); this adapter will allow me to use my iPod headphones which so far have held up for almost a decade.

Intergalatic pretension

In college I was a movie critic. Even so, my tastes in film (now video) have pretty simple: good guys, bad guys, plot, characters, meaning. My wife and I walked out of Oscar-nominated Glengarry Glen Ross by David Mamet because it was so dark and there was no one to believe in.

Two TV series that I’ve enjoyed watching were Stargate series, on the Sci-Fi Channel. (Through some fluke of technology or market segmentation, the Sci-Fi Channel is free on basic cable here.) However, both shows are now cancelled.

Tonight is the final episode of Battlestar Galacitca, a remake of the campy 1970s series. In the original series, the characters were anti-establishment rebels — space cowboys — that won the day in triumphing over evil.

In the re-imagined series, there are no good guys or bad guys, just shades of gray. Not only are evil human-killing robots spun as sympathetic figures, but the good guys are now a metaphor for immoral contemporary figures from Iraq or Guantanamo Bay. (Half the guys are now gals — hence a lot more sex — but that’s another story).

So between the over the top plot twists — worthy of Dallas, Dynasty or Desperate Housewives — and the general lack of central protagonists, I stopped watching the show a few years ago, despite the Stargate lead-in.

On Monday, the TV network ran one of those fawning self-indulgent “making of” shows that only Hollywood can muster. This one went on and on about how this was a great experience in their lives, the best work they’ve ever done.

At one point, an actor said the show is like Blade Runner — 25 years later, it will be recognized how great it is. I saw Blade Runner when it came out in 1982 and admired its craft back then. I also saw 2001, Star Wars, Terminator and several of the other best Sci-Fi movies when they came out.

I knew Blade Runner and Battlestar Galactica, you’re no Blade Runner. Blade Runner was exotic, imaginative and subtle. Battlestar Galatica was preachy, self-important and bombastic.

So when the Sci-Fi Channel tonight bids farewell to Battlestar Galactica, I say good riddance. I’ll continue to check out back episodes of Stargate (SG-1 or Atlantis) and Star Trek (Enterprise or Voyager) from the local library. On a Saturday night, I’ll dust off my DVDs of 2001 or the six Star Wars episodes and share them with my daughter. Someday, I’ll show her the Terminator series and its testament to heroic bravery in the face of overwhelming odds.

Apparently the desire to move beyond sci-fi has possessed the Sci-Fi Channel to abandon the genre altogether: the channel is becoming “SyFy” in June. (Much of the week, the channel is already cluttered with made-for-TV horror movies and psuedo-scientific paranormal shows).

I don’t quite get how in a world of 500 cable channels, there weren’t enough Sci-Fi fans to justify a dedicated channel. I guess all I have to look forward is the re-imagined Star Trek movie, which unlike Battlestar, might actually be better than the original.

Thursday, March 19, 2009

AT&T's partly unlocked iPhone

As reported by the Boy Genius Report, AT&T will be offering iPhones without the normal 2-year contract at a $400 premium ($600 and $700 vs. the subsidized $200 and $300).

The “No-Commit” policy means there is no written commitment to keep AT&T service, but it’s not clear if the phone will still be locked (from a technical standpoint) to only work on the AT&T network. If the phone is still locked, then this option is only useful with GoPhone, AT&T’s prepaid network.

This isn’t much of a breakthrough for openness, and far short of what regulators are compelling Apple’s European carriers to do.

Of course, users have been figuring out how to hack the iPhone to run on the only other GSM network in the US — the T-Mobile network. There’s a discussion thread on MacRumors with more than 400 posts just about this topic.

Graceful newspaper exit

Updated 9am with WSJ coverage

Unlike the closing of the Rocky Mountain News, the online-only Seattle Post-Intelligencer, and the pending cutbacks (threatened online-only) at the San Francisco Chronicle, Wednesday‘s story from San Diego has a (temporarily) happier ending.

The U-T (as it’s been known since even before the 1982 merger of the two Copley Press papers) announced its own sale to Platinum Equity, a Beverly Hills private equity firm. The sale will mark the exit of the Copley family from owning the 140-year-old paper since 1928. As with other family-owned newspapers, the current owner (David Copley) has more interest in spending the riches, not running a business, and Copley has been dismembering the family empire for the past three years.

Terms were not announced. Rumors have it that the price was near $15 million, although Copley reportedly retained a share in the paper’s future success. The Voice of San Diego estimated that a metro daily should bring $500 per subscriber — which for the U-T would amount to $140 million.

Why did Platinum buy the paper? It doesn’t know how to run a newspaper, but it is working with David Black and his Black Press which owns the Akron Beacon Journal and bought the nearly-defunct Honolulu Star-Bulletin (a sickly paper in a two-newspaper town) for $10K in 2001.

One theory (advanced in the LA Times) is that the new owners are planning on consolidating the San Diego paper with other papers — since both the main Orange County and Los Angeles papers are for sale.

Another theory is that the new owners — like other private equity firms — will just be more ruthless about cutting costs. While local politicos hope for improved coverage, David Black promises “reorganization and severances.” Black has a reputation for hyperlocal coverage and deep cost cutting.

A third explanation is Platinum is not buying a newspaper, but a real estate company that comes with a paper. One estimate is that the paper’s 13.5 acres of land is worth about $105 million, which would be a pretty good acquisition for only $15 million.

This latter possibility would not be encouraging for either newspaper employees or the San Diego public. When private equity firms bought Mervyn’s, they sold the real estate at a profit and left the department store to wither into bankruptcy.

Still, if the UT dies — or goes online only — there are already other alternatives. San Diego also has a decades-old (printed) weekly newspaper (San Diego Reader) plus three online-only papers: the Voice of San Diego, San Diego City Beat and the planned San Diego News Network. Online news snippets are also available on six local TV websites and three local news radio stations.

Update Thursday 9am: The Wall Street Journal account this morning is entitled “San Diego Paper Lands Fire-Sale Buyer”. Two excerpts:

The deal price wasn't disclosed, but a person familiar with the matter said it was less than $50 million, a price largely driven by the Copley Press real estate, which includes the complex housing the Union-Tribune and another facility.

The paper generated about $100 million in cash flow in 2004, according to people familiar with the paper's finances, meaning the Union-Tribune could have been worth $1 billion based on valuations at the time. Now, the paper is close to break-even, these people say, as it has been battered by the collapse of newspaper classifieds.
In only five years, the value of being a monopoly user heir has fallen 95%. This is likely to engender panic among the coupon-clipping 3rd and 4th generation heirs of newspaper dynasties like the Sulzbergers (NY Times) and Grahams (Washington Post).

Wednesday, March 18, 2009

Sun runs into IBM's arms

The Wall Street Journal and the New York Times reports this morning that IBM is in talks to buy Sun Microsystems. Since the end of the dot-com bubble, the once-great company has fallen on hard times.

Sun twice was able to pull off a really clever positioning. First, they were the king of open — the leader of the Unix-based open systems movement. Unlike their competitors, they didn’t dabble in Unix but bet the whole company on it — and were particularly effective in using it to beat the once-great Apollo into waiting arms of HP. (This is the subject of a well-known academic paper by Raghu Garud and Arun Kumaraswamy). They also once had a large standardization organization, headed by my friend Carl Cargill, that played the standards game as well as anyone.

After that, Sun rode the dot-com wave better than anyone. If you were a VC-backed Internet startup in the 1990s, the first check with the VC money was to buy the Sun server so that you’d have something to deploy a production-quality 7/24 service. However, Intel spent hundreds of millions to create OSDL and target Sun’s core business with commodity Lintel boxes, and today such servers are more than adequate for most commercial purposes.

So with both the end of Internet growth and the commodization of Unix by Linux, Sun has been casting about for a third strategy. For almost a decade, Sun has been ambivalent about the open source tide that is ending its proprietary (if open standard) source of software differentiation.

It’s made big gambles (like a $1b on buying MySQL) to become more entrepreneurial and more aligned to open source, but the large established bureaucracy has rejected such outside influences. Despite ongoing layoffs, collapsing share prices and predictions of eventual failure, CEO Jonathan Schwartz has been no more effective than founder Scott McNealy at fundamentally transforming Sun into a lean, mean fighting machine.

The WSJ reports that the core turnaround strategy has changed:

In recent months, Sun has approached a number of large tech companies in the hopes of being acquired, said people familiar with the matter. The world's largest tech company, Hewlett-Packard Co., declined the offer, said a person briefed on the matter. A spokesman for Dell Inc., the world's third-largest server maker, declined to comment.
IBM seems like a good fit for Sun: if anyone has been able in the past decade to run an effective large IT company, IBM has. And now that Sun is a shell of their former greatness, most of the antitrust issues should be gone.

There is the question of East Coast vs. West Coast culture, but this does not seem like an example of such a disaster (as in my study of Linkabit’s 1980 acquisition). IBM is more innovation oriented than most East Coast firms, and Sun more bureaucratic than most West Coast firms.

IBM acquiring Apple in the 1990s would have been a disaster (but fortunately the self-serving Apple executives got greedy and demanded twice the price, paving the way for the Jobs II era).

Now Sun is in play, with its shares up 60% today. Its customers will reassured if it gets acquired and survives, and spooked if there are signs that the deal is going to fall through — leaving no other obvious edngame.

Cartels are bad except when they’re not

House Speaker Nancy Pelosi has written a letter asking the Justice Department to exempt Bay Area newspapers from customary antitrust restrictions. I'll leave aside my cynicism about someone who normally rants against business control and monopolies flacking for a local paper that provides fawning coverage.

However, the reality is that for major American newspapers, antitrust exemptions — in the form of joint operating agreements — have failed and always will fail.

The Seattle Post Intelligencer (now defunct) was part of a joint operating agreement, as was the Rocky Mountain News.

The JOA is supposed to allow business cooperation but editorial competition to allow multiple papers to survive in a given city. However, towns with multiple dead tree newspapers are an anachronism that will eventually go away.

In some towns, there are multiple attempts at building alternative media. For example in San Diego there are two online alternatives: the non-commercial Voice of San Diego will be joined today by the advertiser-supported San Diego News Network. Both are up against the local news monopoly, the San Diego Union-Tribune — which is still for sale.

As has been true for a decade, the firms don’t need to find ways to save their dying 20th century business models, but to instead find a new business model that acknowledges the impact of the Internet and Google on their traditional business.

Tuesday, March 17, 2009

GrandCentral is becoming Google Voice

I was checking my GrandCentral voicemails over the weekend on GrandCentral and saw this:
While it is reassuring to hear that GC is ending its endless beta, the banner seems a bit premature, in that all the email still stays “GrandCentral.”

The Google Voice page lists the same features GC had when Google bought it almost 2 years ago: call forwarding, call screening and blocking, distinctive reading. From the coverage in Red Herring and by columnist Larry Magid, apparently the major new features are voice messages via SMS (and speech-to-text), and conference calling. As Fool Anders Bylund notes, the new service benefits from some of Google’s other experiments like Google 411.

The home page say “If you are a GrandCentral user, over the next few days you will be prompted to upgrade to Google Voice” while GC cofounders Craig Walker and Vince Paquet make the same point in the official announcement without saying “upgrade.”

I am guessing that those who do not “upgrade” will remain behind on the GC servers running the old code until Google shuts them off in 6-12 months. In my inbox, it says “Your account is not yet ready to be upgraded. Please check back shortly.” which implies they plan to transition people in waves.

This seems the ultimate in commoditized telecommunications. Free call forwarding, free calls (to US phones) from your desktop. If it’s already free, then it doesn’t seem like there will be a price war. Does this mean other firms will be deterred from entering or does this mean there will be competition based on R&D spending to add new features (thus providing huge economies of scale).

The original GrandCentral was a freemium play — in fact, that’s where I first heard the term. For GrandCentral then — as with all aspects of Google beyond search today — the value capture is unclear — whether because they’re not sure of what they’re doing (e.g. making it up as the go along), because they’re ultra-secretive, or because the emperor really is standing there buck naked.

In the meantime, viable business model or not, I’ll glad sit here and drink the free beer, and hand out my GC phone number on my business card. Thanks Craig and Vince — whether or not Google makes money off of it, I find your service useful and will continue to use it as long as the price is right. That’s what commoditization is all about.

Dead tree paper now dead

A few days after winning concessions in San Francisco, Hearst pulled the plug on the oldest newspaper in Seattle. As expected, the Seattle Post-Intelligencer published its last edition today. (The demise probably won’t rank in the top 10 newspaper failures this year).

In a familiar pattern dating back decades, the newspaper reported its own demise and its residual post-newspaper activities:

The Seattle Post-Intelligencer will roll off the presses for the last time Tuesday.

The Hearst Corp. announced Monday that it would stop publishing the 146-year old newspaper, Seattle's oldest business, and cease delivery to more than 117,600 weekday readers.

The company, however, said it would maintain seattlepi.com, making it the nation's largest daily newspaper to shift to an entirely digital news product.

"Tonight we'll be putting the paper to bed for the last time," Editor and Publisher Roger Oglesby told a silent newsroom Monday morning. "But the bloodline will live on."
However, that bloodline will be mighty thin. Eliminating the print edition meant layoffs for more than 140 of the 167 reporters, photographers and editors. Only 20 “news gatherers” will remain, supplemented by 20 ad sales reps for SeattlePI.com. The paper will be supplemented by “150 citizen bloggers.”

Absent new business models, these sort of layoffs will be coming to most big city newspapers by 2020. If newspaper publishers — and journalists — want to survive, it’s time to try more radical measures rather than incrementally cutting their staff 10% a year for the next decade.
The definition of stupidity is doing the same thing over and over again and expecting different results. — Albert Einstein

Monday, March 16, 2009

A continuing SJSU dynasty

The student paper this morning proclaimed:

SJSU captures its 44th national collegiate tournament victory
next to a picture of two guys on a judo mat.

Inside the paper, it reported that out of 20 schools competing for the judo championship, SJSU won medals in 9 out of 11 weight division, winning 43-27 over UC Davis. This was the 44th time that SJSU won the National Collegiate Judo Championships in the 48 years that the competition existed. I cannot recall another example of when “SJSU” and “dynasty” could otherwise be used in the same sentence. (Neither the Bushes nor Kennedys aspire to run the joint.)

As a former newsman, this seemed like a story. However, the story was (or should be) a familiar one to anyone who lives in San Jose. In all 44 cases, the team was coached by SJSU’s Yoshihiro Uchida, who created the collegiate championship in 1962 and in 1964 became the first coach ever for the US Olympic judo team.

The competition was held in SJSU’s Uchida Hall, one of many honors that has accrued to the modest legend with his legendary modesty. (But then quiet humility is a trait that was common among the Nisei of his generation.)

As it so happens, one of my former MBA students, Ilya Ronin, was on the judo team as an undergraduate when it won four of those championships. Now he’s bootstrapping an exercise equipment company by selling it to judo coaches, among others.

Cramer vs. Stewart II

My posting Saturday attacking Jon Stewart’s attack on Jim Cramer brought more comments than usual — perhaps because I put it on my Facebook page, and most of my Bay Area friends are to the left of center (except for the occasional Libertarian).

Since I wrote the posting, there have been some other interesting observations on the tussle.

Simon Houpt in the Toronto Globe and Mail wrote Saturday:

Thank God for CNBC. At least, that's what Jon Stewart and his writers at The Daily Show must have been saying for the last week and a half. Because the uncomfortable truth, writes Simon Houpt, is that ever since George W. Bush left office on Jan. 20, the faux-news comedy show has been running on fumes, visibly desperate for a fat new target. Enter Mad Money host Jim Cramer ...
Editor & Publisher columnist Greg Mitchell, author of a forthcoming book entitled Why Obama Won, puts the Cramer trashing as just the latest successful effort of Stewart to sway American political opinion.

USA Today media columnist Robert Bianco advised Cramer (post hoc) to “know your enemy:”
Stewart may be a comic, but he's an incredibly smart and increasingly influential one — a media darling whose comments get amplified by print, TV and the Internet.

Stewart also can be unrelenting, something Cramer must have missed when he agreed go on his show. The Daily Show is not Saturday Night Live, where merely showing up wins you a kid-glove-treatment pass, and Stewart is not the kind of host who strikes whatever pose the audience and guests prefer that night. He has strongly held positions and a forum that allows him to express them with blistering precision — as he did Thursday, to the dismay of a seemingly shell-shocked Cramer. To go into that forum unprepared, as Cramer appeared to do, is suicidal.
Finally, responding to critics of his initial story, Newsday TV columnist Verne Gay got it exactly right. The whole piece is worth reading, but here’s an excerpt:
The reporters at the Wall Street Journal and the New York Times -- and my paper, too -- do a magnificent job in this difficult endeavor day after day. So, my rhetorical question: How did these dedicated professionals miss the biggest story of their lifetime? They reported the facts correctly, and they understood fully the implications of an ever-expanding market in various securities year after year. The word "bubble" became not merely part of their vocabulary but part of their daily professional lives. So, how did they miss the story?

One reason -- the story was astronomically complex, and changed quickly -- and profoundly -- from one day to the next. The outcome was by no means clear. Another reason -- they didn't have all the facts, through no fault of their own. Banks -- for example -- hid vast amounts of junk loans on their balance sheets until they were forced to reveal them. An Edward R. Murrow -- to use one writer's example -- couldn't have uncovered that garbage. Neither could an army of highly trained and responsible financial reporters. Neither, it appears, could the former chairman of the Federal Reserve. Maybe Stewart should have him on the show.

Sunday, March 15, 2009

Smartphone market share

2008 Q4 smartphone marketshare estimates from Gartner, and the folks at the Symbian Foundation are crowing about the results:

  • Symbian 47.1%
  • RIM (BlackBerry) 19.5%
  • Windows Mobile: 12.4%
  • Mac OS X (iPhone) 10.7%
  • Palm OS 0.9%
  • Other 1.1%
If I were working for Symbian (or Nokia), I’d be a little less sanguine. Compared to a year ago, Windows Mobile and Palm OS are unchanged, but RIM and Apple have risen from 14% to 30%.

Nokia still doesn’t have a US presence, and until they do, RIM and Apple will continue to clean up here. The question is, will its rivals make significant inroads into Nokia’s dominant smartphone market share in Europe and the Rest Of World.

Apple may have a superior product, but it has two key vulnerabilities. First, in most (but not all) of the world, it has limited distribution through its country exclusives. RIM and Nokia have been trying to get their products distributed as widely as possible.

Secondly, Apple has a single premium-priced product while its rivals have product lines at a wide range of price points. In a price-sensitive economy, even in the high-end smartphone segment one would expect demand to shift to less expensive models.

Apple will someday have a range of iPhone products, just as it has a range of laptops. It’s possible those products will be announced in June, but Apple could lose a lot of its hard-won share in the meantime.

Chronicle to readers: We're not dead yet!

Facing the threat of closing, reporters and photographers of the San Francisco Chronicle voted Saturday to make major concessions. As the Chronicle itself reported Saturday night:

Members of the San Francisco Chronicle's largest union overwhelmingly agreed to contract concessions that clear the way for cutting at least 150 union jobs and eliminating certain benefits and rights, measures the company says are essential to save the newspaper.

The 366 workers who cast ballots approved the revisions by a margin of around 10 to 1. If a majority of employees had vetoed the changes, management said they would have had to cut 225 positions represented by the California Media Workers Guild, Local 39521, with limited severance, to achieve the necessary savings, according to the union.
The Guild represents 483 Chronicle employees, including 218 in editorial and 265 in advertising, circulation, finance, ad production and other functions. The union had recommended membership approval.

Saturday's agreement is just the first step in Hearst's efforts to achieve the hoped for cost savings. The company still must negotiate a deal with its other major union, the 420-member International Brotherhood of Teamsters, Local 853.
Like many other papers, the Chronicle has no solution to its woes.

NY Times publisher Arthur “Pinch” Sulzberger said last week that there is no imminent solution, and when (if) there is one, it’s unlike to be one-size-fits-all:
I am not here to tell you I have the answers to our current dilemma – attracting more revenue, be it by charging for an online article reporting on the day’s activities in the Middle East the way iTunes charges for U2’s latest hit single; or examining new journalistic organizational structures, such as moving from a traditional profit-making model to a not-for-profit entity whose funding is secure in the hands of, say, Bernie Madoff.

One of the many reasons why such a solution is so elusive is that what works for The New York Times is not going to work for Newsday or The LA Times; what works for NYTimes.com is not going to be a solution for Politico, Salon or Slate. As I will discuss shortly, each site has a different relationship to the Internet and has to be evaluated on a case-by-case basis.

In our heart of hearts, we all wish there would be the equivalent of the deus ex machina moment when the gods descend and provide us with a perfect business model for the new media. Alas, Mt. Olympus has been quiet for quite a while, and real life tends to be a bit messier and less predictable.

Saturday, March 14, 2009

Dishonesty in finance and media

Diogenes once sought an honest man, and based on my experiences with financial services, he would have to look a long time to find one. Two media events today caused me to reflect on the degree of honesty in this sector.

The financial services where I’ve had the most interaction has been with real estate agents. A good agent would be honest, competent and always have the client’s (i.e. my) interests paramount.

In 25 years of buying and selling homes, I’ve had exactly two that get an A on all three counts. One left the business when she got married, and we lost touch. The other agent helped me buy my current Bay Area home, helping us look for eight months (and made five offers) while always putting our interests first.

In the long run, I think the commissioned Realtor® is going the way of the commissioned travel agent, disintermediated by greater availability of financial information made possible by the Internet. Fortunately for Rich, I think that the tidal wave will probably hit after he retires.

At the other extreme was the financial advice I was getting this morning when I flipped radio stations on the way to work. This investment show was run by a fee-based mutual fund company.

This is someone I’ve been suspicious of for a while, because his ads last fall implied that anyone should change brokers if they had a 30% drop in their 2008 stock balances. (The S&P 500 was down 39% for the year.)

Today he also pumped up mutual funds over real estate, based on a distorted representation of recent housing prices. Here in the Bay Area, $1 million in Palo Alto real estate would have certainly held up better than $1 million in the equity of Palo Alto tech companies.

What nearly caused my jaw to drop was his advice on “buy high, sell low.” The caller had two funds — one that lost 11% for 2009 and thus was in the “top 16%” for comparable funds, and another that was down more than 20% and was in the bottom 5% for the industry.

The advice of the “expert” was — absent any information other than the fund’s recent performance — was to sell the fund that was down the most. This is contrary to key principles of financial investing.

One principle is to buy low, suggesting that the depressed assets of this fund might have a great potential to rebound. The Forbes mutual fund rankings of the past 20-30 years have tended to show that good up market funds are bad down market funds, although there are a small number of funds that are good in both and a larger number of funds that are bad for both.

The other principle is — as my fund manager has emphasized over the past four months — what you hold should be determined only by its potential to appreciate from now on; the performance of the past two months tells us nothing about this. This is exactly what we teach in business schools: forget the sunk cost fallacy in any decision of whether to continue a strategy or investment.

Which brings to the Jon Stewart-Jim Cramer smackdown last week. I hadn’t heard about the show because I don’t watch cable, except the Sci-Fi channel and Man vs. Wild (before that, Survivorman).

However, catching up with my Facebook friends last night during a bout of insomnia, I noticed that many of them were praising Stewart for trashing Cramer.

Cramer is clearly a smart guy who understands financial markets. From what little I’ve seen — in hotel rooms and on CNBC.com — like other celebrity stock pickers there is a bias towards buy recommendations which makes him a bit of a tout. I wouldn’t trust any TV commentator for recommendations on a stock, market sentiment or a political candidate: the medium encourages oversimplification and exaggeration, not thoughtful analysis.

In 2008, Cramer was spectacularly wrong about the stock market, but then so was nearly nearly all of the financial media and the financial services industry. Few saw that subprime mortgage defaults would take down Wall Street investment banks, the stock market and eventually the entire global economy. Skeptical voices like the FT’s John Authers — who began calling out warnings back in April — were few and far between.

Despite Cramer’s manifest failings, there are three things that bother me about the fawning praise of Stewart and his staged confrontation with Cramer.

First, there’s no evidence that Stewart knows anything about investing, the economy or financial markets. So while (like the ambush interviews of 60 Minutes) he’s welcome to tear down anyone he wants, his choice of who to attack and who to promote is based on his own personal biases (or other factors) rather than a deeper understanding of the truth than his subjects. (A knowledgeable iconoclast like John Bogle is someone whose criticisms would actually tell us something.)

Second, I’m curious about the timing. The disaster of following bullish investment advisors was obvious in October or any other time since then, so why now?

Cramer and his CNBC colleagues have been among the few free market types with a microphone criticizing the excesses of the spendaholic administration and Congress, so is Stewart making (in effect) a partisan attack? Columnist Mark Hemingway puts it succinctly:

The problem is that Stewart’s critique of Jim Cramer, or of the financial press in general, is not new or particularly relevant — banks have been collapsing for a year. It only became an issue when Stewart wanted to delegitimize Santelli and Cramer’s comments on the Obama administration.
While normally such interpretations seem worthy of the black helicopter conspiracy theories, there is the administration’s semi-official reaction:
White House Press Secretary Robert Gibbs said Friday he "enjoyed" Jon Stewart taking down CNBC's Jim Cramer on his show on Thursday night. And giving an insight into the Obama-Gibbs relationship and what it is they talk about when they talk, Gibbs revealed that he and Obama discussed earlier Thursday watching the show.

Footnote: Gibbs has been scornful of some of the relentless cable output and was gleefully hard on CNBC's Rick Santelli who blasted Obama's home mortgage foreclosure plan.

At the Friday briefing Gibbs was asked, "Does the White House believe that this is the obligation of journalists to call out lies, to warn the public that there are dangers ahead?"

Gibbs said, "the President and I talked earlier in the day yesterday about watching it. I forgot to email and remind him that it was on, so I don't know if he's seen it. I enjoyed it thoroughly -- (laughter) -- despite, even as Mr. Stewart said, that it may have been uncomfortable to conduct and uncomfortable to watch.
At a minimum, this means that the president sees Stewart protecting his political flank. The FT’s Authers (one of the few investment analysts whose credibility was enhanced by the 2008 fiascos) on Friday called the Stewart-CNBC fight a “divisive political debate,” and concluded:
The populist anger, earlier directed against the president, now appeared to be aimed at those who had egged on the market.
Beyond any political motivation, there is the question of Stewart himself. Obama supporter Megan McArdle put it best:
Ultimately, I find Stewart disturbing because in some sense he's doing exactly what Cramer is--making powerful statements, and then when he gets called on him, retreating into the claim that well, you can't really expect him to act as if he were being taken seriously. Jim Cramer, whose stockpicking acumen seems slightly worse than your average monkey with a dartboard, frequently issues recommendations that people act on, then brushes off the failures with a shrug.

Jon Stewart also shapes peoples' decisions. Video is a medium with powerful claims to reality--people tend to think that if they saw it, it must be true. This makes it uniquely good at manipulating its audience with skillful editing. I'm very sympathetic to Stewart's deep critique of financial shows, but I don't think the way to go about it was to string together a bunch of very misleading clips. Nor to imply that Santelli, who has been vocally against all bailouts from the beginning, was merely frothing on the forclosure program because ordinary taxpayers were finally getting a taste of federal largesse. But Stewart carefully claims he's just an entertainer, so he has no obligation to hew to journalistic standards on things like quoting out of context.

Financial journalism isn't, as Stewart argues to Cramer over and over, entertainment. So how come Stewart acted as if it was?
Since I first saw his show, I’ve had little use for Stewart and his smarmy self-importance. He can attack and ridicule and claim it’s just comedy, and then when he gets serious, we’re supposed to believe that he is handing down truth from on high. (Alas, some fools seem to believe that that’s what they get when they watch his show.)

This is a man who is no different from any other demagogue, whether Huey Long, Elliot Spitzer or Mike Huckabee. He will clearly will say or do anything to get ahead.

Some forty years ago, my mom was suspicious of a Republican candidate who espoused centrist views similar to her own, but seemed lacking in personal integrity. She called him “Tricky Dick,” and a few years later her intuition was proven correct.

Stewart is just a modern spin of the political pundit who fancies himself a kingmaker. The false accusations of “muckraker” Drew Pearson destroyed Preston Tucker and his innovative car company, and who knows how much damage Stewart will ultimately do before he is inevitably discredited.

If someone is setting himself up as a critic of the financial media, he should be held to the same standards as any financial services representative: honesty, competency and putting the interests of his client (in this case the media consumer) ahead of his own. There is little evidence of any of these in Stewart’s performance this week, no matter how much adulation he gets from fellow travelers who share his biases or economic ignorance.